We kick off the month with some positive data on UK manufacturing. The monthly PMI, covering activity in April, continued to show expansion and with the pace of increase accelerating to its fastest pace in three years. This follows on nicely from the official data reporting growth across industry in the first three months of this year. So what’s behind all the positivity?
What’s the magic number?
The composite index, pulling together manufacturers’ performance on variables such as output, new orders, employment, prices and inventories, has been showing expansion consistently since last August (any reading over 50). April’s showing was the strongest since April 2014.
Markit’s report reveals across the board gains in the components of the index – production, UK sales, exports and employment all faring well at the start of the second quarter. Price increases are also still filtering through to customers following increases in commodity prices and the effects of the weaker pound on import prices.
Reasons to be cheerful?
One of the big reasons behind the strong readings in the UK is the upswing in global manufacturing activity. European PMIs have also been setting records over the past few months – the eurozone index rocketed to a six year high.
Critically, it also seems like the synchronised upturn is leading the world to start investing again. Lower commodity prices and concerns about the outlook in emerging markets were a couple of factors behind the pause in manufacturing activity and investment over the past couple of years.
With the UK report singling out the investment goods sector as having a particularly strong month in April, this is corroboration of our analysis of the preliminary GDP data last week, which showed that industries relying on investment related activity are doing rather better than those tied to consumer spending.
Given this brightening global picture, together with the weaker pound, it would surely be more surprising if the UK manufacturing wasn’t running at a three-year high. This is also likely to translate into positive investment trends at home – or at least you’d safely assume that would be the case in ‘normal’ economic/political times. A general election and the whys and wherefores of Brexit negotiations present more questions marks about investment decisions than normal.
“the potential for disappointments remains high”
There can’t be good news without mentions of some possible risks. The IMF probably put in best in their World Economic Outlook report last month when they noted that the ‘potential for disappointments remains high’.
These include, but are not limited to unfinished business with Europe’s fragile banking system, risks of the geopolitical sort and the adoption of protectionist measures.
Someone one said that the roof should be fixed when the sun is shining (who was that guy?) and the policy foundations for ensuring that when manufacturers do invest, they choose to do it here, should be laid now. Or at least after the election.
A strong run of data for manufacturing shouldn’t put industrial strategy on the back-burner, it’s a reminder why we should be pursuing more balanced growth in the first place.